Rachel Reeves has been accused of “sinking to a new low” after HMRC confirmed how a new inheritance tax rule affecting some pensions will operate from April 2027. The criticism came from TV presenter Cristo Foufas, who wrote on X: “Every time I think Rachel Reeves can’t sink lower.”
He was responding to a post by internet personality Neil McCoy-Ward, who claimed pension schemes will be able to withhold up to 50% of a person’s retirement savings for up to 15 months to cover potential inheritance tax bills. Mr McCoy-Ward suggested families could be left without access to funds while funeral costs and other expenses mount.
The rule in question relates to how inheritance tax will apply to certain pension death benefits from April 2027, following changes announced in the 2024 Budget.
However, HMRC’s published technical note makes clear that this is not a blanket rule and will only apply in limited circumstances.
Under the new framework, a personal representative, such as the executor of a will, can issue a “withholding notice” to a pension scheme administrator.
This can only happen where they know, or reasonably believe, that inheritance tax may be due on the deceased’s pension.
Most estates will not have an inheritance tax liability, and HMRC states withholding is not intended to be used routinely or as a precaution.
Even where a withholding notice is issued, beneficiaries must still be able to promptly access up to 50% of their entitlement. The scheme cannot withhold more than half of what is due to each beneficiary.
The notice can only apply between the date of death and 15 months after the end of the month in which the person died.
It automatically ceases once inheritance tax is paid, the notice is withdrawn, or the 15-month period expires, whichever comes first.
Crucially, the guidance explains that retaining funds in this way helps protect personal representatives and other beneficiaries from having to use non-pension assets to settle any inheritance tax bill.
In other words, without the ability to withhold part of the pension, families could receive the full amount, only to be presented with a tax demand later. They might then have to find the money from savings, property or other assets.
Payments to exempt beneficiaries and certain excluded benefits are not subject to withholding at all.
The legislation also makes clear that pension scheme administrators should not delay distributing benefits if they have not received a valid withholding notice.
While critics argue the change represents a new tax grab, the operational detail published by HMRC frames the rule as a safeguard.
It ensures any inheritance tax due can be settled from the pension itself, rather than leaving executors personally liable or forcing families to cover the bill from elsewhere.
Very few pensions are expected to fall within scope, as the measure only applies where inheritance tax is actually due on the estate.
Final guidance is due in spring 2027, ahead of the rule taking effect in April 2027. More information can be found here.
The Express has contacted the Treasury for a comment.